Corporate Bailout: Intentionally Bungled?

Earlier, I posted about how executive pay can drain companies and destroy jobs. Today, I cannot help thinking about how our politicians have committed to funneling billions of tax dollars to some of the same executives who managed to personally enrich themselves while driving their companies (and our economy) into a ditch.

Naturally, this led me to think about one of the big “mistakes” that government officials made when crafting the Wall Street bailout plan: the failure (or refusal) to insist on accountability.

The purpose of this year’s $350 -$700 billion corporate bailout was to unfreeze credit markets by sending cash to banks so they would start lending money again.

Some bailout-fund recipients, however, chose to use the money for purposes other than generating loans. (NY Times)  At the end of October, the Associated Press reported:

“[R]eports surfaced that bankers might instead use the [bailout] money to buy other banks, pay dividends, give employees a raise and executives a bonus, or just sit on it.” (AP)

Apparently, companies that received bailout funds were legally allowed to not use those funds to help our nation’s economy by unfreezing credit markets.

Why? Because Congress and the Bush Administration (which includes Treasury Secretary Henry Paulson) either failed or refused to legally require companies that get bailout funds to actually use the money to generate loans.

Setting such a requirement would have been easy: some sentences drafted by staff lawyers at Treasury or Congress were all that was required.

Can we chalk up the bill-drafting failures to human haste or tiredness? Were our government officials simply naive? I doubt it.

Mr. Paulson was CEO of Goldman Sachs before becoming Treasury Secretary in 2006.  He is savvy and knows how the folks running the banking firms operate.

Some representatives in Congress might not be the sharpest tools, but they have access to staff lawyers (as do Mr. Paulson and other Bush Administration officials). 

Basic principle: if you give a guy money and don’t contractually require him to spend it in certain ways, then he is not required to spend the money in certain ways.  Period.  End of story.  First-year law students understand this principle.

I suspect that officials in Congress and the Bush Administration — including Mr. Paulson — also understand the principle.

The big question: why didn’t they insert into the bailout bill some sentences requiring bailout-fund recipients to spend our tax dollars on generating loans and unfreezing credit markets?

The bailout plan started as a roughly 3-page Treasury Department proposal.  If memory serves me, the first House bill (which was voted down) was about 100 pages. The final bill (which was passed) was 451 pages and reportedly chock full of pork or riders.

In short, government officials were very busy adding thousands of sentences to the final bailout bill before both houses of Congress passed it.

If those officials had time and hand-strength to insert 300+ pages of stuff into the bailout bill, then they could have inserted sentences requiring companies that received bailout funds to spend that money on generating loans.

And yet, such sensible sentences are conspicuously absent from the bailout bill — just as absent as are sentences that would have ensured various forms of accountability.

If the omission of such sentences was accidental, then a whole slew of government officials and staffers should be replaced by competent people — and that’s the best-case scenario.